Concept of Permanent Establishment

PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Therefore, in order to decide whether a PE is constituted, one has to undertake a functional and factual analysis of each of the activities undertaken by an establishment. The crux of the analysis lies in whether the Branch office / LO has been performing only such functions which are of a preparatory or auxiliary character or whether it is actually carrying out full-fledged activities, as carried on by a branch/subsidiary/JV of an organisation.

Where the Branch / liaison office creates a PE or establishes a business connection, the foreign company would become liable to pay tax on the profits, which can be attributed to the Branch / liaison office. But if Branch / liaison office doesn’t create any of the aforesaid relationship, Branch / liaison office will not attract any income tax in India.

A Branch / liaison office of a foreign entity in India is usually not considered a PE on the ground that it is set up to carry out preparatory or auxiliary activities (which do not constitute business/commercial activities). Although the Foreign exchange Management act, 1999 (FEMA) prohibits a liaison office from undertaking a commercial activity, for the purpose of tax law a Branch / liaison office may be held to be a PE if it is found to be engaged in a core revenue generating activity, in India. In such circumstances, the income attributable to the activities of the liaison office will be taxable in India @ 40% plus applicable surcharge and education cess.